Groups » Start-Up in Smoke: Cannabis Entrepreneurs and License Requirements

For supporters of cannabis and marijuana products, the recent legalization of the drug in 26 states in America is a return to the recreational acceptance that was prevalent in the United States in the early 1800s. It was not until 1906 that the American government began to label cannabis as a controlled substance and issued concern about its use, while it had been used in traditional medicine and recreationally up to 2000 B.C. in other areas of the world.

Today, the legalization of cannabis offers an opportunity for both investors and entrepreneurs to establish legal growing operations that are licensed, taxed and which can abide by the guidelines and laws set forth by each state. Cannabis has been a controlled substance in the United States after being classified a “poison” in the 1920s, and it was legally regulated by the middle 1930s in America after 35 states adopted the “Uniform State Narcotic Drug Act” followed by the “Marihuana Tax Act of 1937,” which was the first national regulation of the drug.

In 2016, an article in Entrepreneur Magazine titled “Where the ‘Gold Rush’ Turns Green: The Profit in Legalized Marijuana,” gave a nod to a new generation of start-up businesses in America. Certainly, the media, and even popular culture television shows about illegal growing operations, appeared to agree that legalized marijuana production was not only a viable and legitimate new business opportunity, it was also a virtually flawless tax revenue resource, particularly in a fiscally difficult global economy.

Cannabis remains a Schedule I drug, despite many attempts to appeal the felony classification, and in spite of the fact that it is legalized in 26 states for use and licensed production. How easy is it for an entrepreneur to find themselves opposing the law, while attempting to launch a successful, high-income business as a licensed cultivator? In this article, we’ll talk about the caveats that entrepreneurs should consider carefully before investing or launching a legalized growing operation.

The History of Marijuana

The first written record of the use of cannabis came from a Chinese Emperor, named Shen Nung, in 2727 B.C. While other ancient cultures including the Greeks, Romans, and Egyptians had prolifically used cannabis medicinally and recreationally, it was the Emperor Shen Nung that first wrote about the use of hemp. He was known as the “Father of Chinese Medicine,” after sharing his passion for apothecary and pharmacology in a book he authored called “The Great Herbal” also known as “The Canon of Herbs.” The ancient text outlines ailments and curatives, based on natural plants and minerals, and while it had been modified over the centuries, the text is still used by Traditional Chinese Medicine practitioners today.

Prior to the recognition of the medicinal qualities of cannabis, ancient civilizations used hemp for fiber production of paper, clothing, rope and other textiles – an industry that still exists today.

Understanding the Business Investment Opportunity for Legal Growers

How much can a business that specializes in cannabis make, and what is the net profit opportunity for entrepreneurs invested in legalized production and distribution? Medical dispensaries are highly regulated, and pay a higher price for products that must meet health distribution standards. Dispensaries are also inspected, scrutinized, and reviewed in compliance with health bylaws, which drives cost of business and administrative expenses up.

Some experts estimate that a recreational business in the cannabis industry experiences a profit margin of 10 percent to 25 percent, with a 50 percent profit rate being more common with businesses that also cultivate their own products (growers). Surprisingly, many independent cannabis business owners claim that the opportunity is less profitable than most assume, and highly taxed by the IRS.

In addition to being a licensed, legal grower of cannabis, there are other lucrative business opportunities in states that have legalized the recreational use of marijuana, including:

Retail sales of edibles, which are required to have a comprehensive list of ingredients consistent with other consumer food products, including the labeling of the THC level. From baked goods and confections, to health food additives and meal replacement products, the market is competitive, but the demand exceeds supply in almost all communities. Vape pens are an emerging high-demand sale opportunity, offering legal recreational and medicinal cannabis smokers the ability to enjoy without the odor – and frequently (although illegally) in bars, on the street, in restaurants, and other social spaces where cannabis consumption may not be permitted.

Tourism is a growing area of business opportunity in legalized states, which have no problem recruiting eager out of state travelers to learn more about cannabis strains and partake in licensed establishments. Like a wine tour, visitors enjoy experiencing different products and the social culture.

Software and app development is another ‘budding’ business opportunity for entrepreneurs, who can design accounting, inventory management, hospitality and other types of essential small business software, tailored exclusively for the cannabis industry.

Legalization also means enforcement of laws and restrictions to cannabis-related production or retail sale small businesses. Inspectors and administrators that are specialized in providing salaried or sub-contracted services to state authorities are in high demand.

Demand often exceeds supply for certain cannabis strains, which drives the wholesale price up for many legalized dispensaries and recreational use businesses. Because cannabis remains a Schedule I drug and a federal offense, financial administration and transactions are also costly, as chartered banks will not manage deposits, payments, or distribution of funds that are derived from drug production or distribution, in compliance with federal laws.

The legal consequences for growing, manufacturing cannabis products, or distributing them for sale without appropriate state licensing comes with severe financial and criminal penalties. Per a Richmond drug crime lawyer, some entrepreneurs in the new cannabis industry are plagued by misinformation about legal requirements; despite legalization, they find themselves on the ‘wrong side’ of the law. Failure to know the bylaws and state statutes regarding cannabis-related business and legal requirements is not arguable in court; entrepreneurs need to consult with legal counsel to ensure that all operations comply with state laws.

Sentencing for illegal production or distribution of marijuana or cannabis comes with significant penalties, as lawmakers in legalized states are determined to reduce and eliminate the criminal element by legitimizing the industry with laws that protect public safety and interests. It is an emerging area of practice for many small-business attorneys, and one that will continue to evolve as legalized cannabis matures as an industry.

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